Housing wealth effects in China
Summary
Focus
One of the most significant risks to Chinese economic activity arises from the housing market. Between 2015 and 2021, house prices and household debt in China rose substantially. However, since 2021 the market has experienced a noticeable slowdown, raising concerns about the potential for a debt-deflation spiral akin to a boom-bust cycle. As the Chinese economy transitions towards a more consumption-driven growth model, the housing market plays a crucial role, given that property constitutes a substantial share of households' wealth. Despite the market's importance, the qualitative and quantitative effects of house prices on consumption in China remain underexplored. This paper fills this gap. We report estimates of the wealth effects of housing on consumption using household-level data.
Contribution
We leverage digital payment data to examine the relationship between housing wealth and consumption in China. Traditional consumption data often rely on surveys, which can lack timeliness and accuracy due to measurement errors. To address these limitations, we utilise one of the largest payment data sets – Alipay – to track household consumption expenditure. Specifically, we analyse monthly Alipay transaction data of Chinese households from January 2017 to April 2023. The data set includes information on users' geographical location, age and gender. We then integrate these data with survey information obtained via Alipay, which provides insights into home ownership and renting status. This combined data set allows us to comprehensively study housing wealth effects in China.
Findings
Our analysis reveals significant housing wealth effects: changes in house prices are positively associated with future changes in consumption in 33 Tier 1 and Tier 2 cities. Specifically, a 10% increase in house prices leads to a 1.6% increase in consumption in these cities. However, this relationship is not observed in smaller Tier 3 and Tier 4 cities. Complementary regressions also show that housing wealth effects are more pronounced among older households and home owners, while renters exhibit no such effect. In contrast, in Tier 3 and Tier 4 cities rising house prices appear to crowd out consumption for younger households.
Abstract
We estimate the effects of changes in house prices on consumption using unique data of Alipay transactions from Chinese households, spanning from January 2017 to March 2023. We find significant housing wealth effects: changes in house prices are positively associated with future changes in consumption in 33 Tier 1 and Tier 2 cities. Specifically, in these cities, a 10% increase in house prices leads to a 1.6% increase in consumption. However, this relationship is not observed in smaller Tier 3 and Tier 4 cities. We also find that housing wealth effects are more pronounced among older households and homeowners, while renters show no such effect. Additionally, in Tier 3 and Tier 4 cities, higher house prices tend to crowd out consumption among younger households.
JEL classification: R2, R3
Keywords: consumption, house prices, savings
